The IMF is responsible for ensuring the stability of the international monetary and financial system of international payments and exchange rates among national currencies that enables trade to take place between countries. The Fund seeks to promote economic stability and prevent crises; to help resolve crises when they do occur; and to promote growth and alleviate poverty.
It employs three main functions envisaged as surveillance, technical assistance and lending, in order to meet these objectives. Surveillance is the regular dialog between the Fund and members to offer policy advice. Generally once a year, the Fund conducts in-depth appraisals of each member country’s economic situation. It discusses with the country’s authorities the policies that are most conducive to stable exchange rates and to a growing and prosperous economy.
Contemporarily, surveillance covers a wide range of economic policies, although the emphasis given to each policy area varies according to each country’s individual circumstances. The surveillance agenda of the Fund specifically includes the exchange rate, monetary and fiscal policies of the member countries, structural policies in developing countries primarily oriented towards economic growth and debt management. The macro issues of the agenda constitute international trade, labor market, assessment of risk and crisis management and reforms in the power structure.
The surveillance agenda of the fund included the financial sector issues, following a series of banking crisis in both the industrial and developing countries. In the wake of financial crises and in the context of member countries undergoing transition from a planned to a market economy, institutional issues about the central bank independence, financial sector regulation, corporate governance, and policy transparency and accountability have also become increasingly important to the global watch agenda of the Fund.
Stabilization has always been one of the domains of the Fund. Its core policy aims at
reducing trade deficit, especially the volume of imports by way of curbing aggregate demand. A trade deficit can be brought down by devaluating the local currency of a country that may result in the increase in production for exports. Consequently, the imports become more expensive, but they can gradually be tapered off to a minimum requirement. In this process, some complications emerge such as slow take-off of exports, increase in the domestic prices and reduction in the purchasing power and aggregate demand.
Fiscal and monetary austerity contributes to lower GDP growth, perhaps slower rate of inflation and reduction in imports. Inflation may also be a significant issue of the Fund, but it is often less amenable to policy control. The financial programming in accordance with the status of balance of payments, fiscal and monetary accounts of the country are used as performance criteria by the Fund.
There are some inflationary and contracting side effects that perpetuate in the institutional reforms strategy in the fiscal and monetary sector of the countries. International institutions like IMF and World Bank need to evaluate the reactions of implementing monetary solutions to rescue the falling economies. A core responsibility of the IMF is to provide loans to countries experiencing balance-of-payments problems. This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth.
Unlike development banks, the IMF does not lend for specific projects. The volume of loans provided by the IMF has fluctuated significantly over time. The oil shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases in IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the crises in emerging market economies led to further surges in the demand for IMF resources.
Non-subsidized loans are provided through four main facilities:
• Stand-by Arrangements (SBA)
• the Extended Fund Facility (EFF)
• the Supplemental Reserve Facility (SRF)
• the Compensatory Financing Facility (CFF)
The lMF also provides emergency assistance to support recovery from natural disasters and armed conflicts, in some cases at subsidized interest rates. The Fund created Special Drawing Rights (SDR) in 1969 as the resources providing short-term benefits to the countries were not adequate. SDRs have been analogized as paper gold, as the SDR special account entry into the IMF books was designed to provide additional liquidity to support the growing global trade requirements.
The SDR is an international reserve asset, to supplement the existing official reserves of member countries. These drawing rights are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the lMF and some other international organizations and its value is based on a basket of key international currencies.
The notion of SDR was considered in the Bretton Woods Conference deliberations, as the member countries in this system needed official reserves provided either by the government or central bank holdings of gold and widely accepted foreign currencies, which could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets – gold and the US dollar – proved inadequate for supporting the expansion of world trade and financial development that was taking place.
The Fund thus created a new international reserve asset known as SDR. This has only limited use as a reserve asset at present, and its main function is ‘to serve as the unit of account of the Fund and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the lMF designating members with strong external positions to purchase SDRs from members with weak external positions.
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold-which, at the time, was also equivalent to one US dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and US dollar. The Fund allocates the SDRs by way of General Allocations based on a long-term global need to supplement existing reserve assets and also by an application made by the countries for special one-time allocations subject to the approval of the IMF Board.